The index measures changes in prices of goods and services to consumers in other words, what we pay for a whole range of everyday needs.
If prices change too abruptly in either direction, it can spell trouble for the economy.
The CPI, which is compiled by the Department of Labors Bureau of Labor Statistics, is an index of goods and services that consumers buy. These prices are tracked nationwide by researchers and fed into a computer model to produce the index.
There are actually several indexes, however the most meaningful one (and the one most often reported) covers some 87 percent of the population.
The CPI is better known to many people as inflation. When you hear inflation rose 3 percent on an annual basis, what that means is the CPI has jumped 3 percent.
The CPI is important because many other products, services and benefits tie into the number. For example, Social Security benefits are indexed to the CPI, which means as the CPI (inflation) rises, so do the benefits.
Union contracts, wages, lease agreements, benefit statements and much more can be tied to this one number.
The CPI doesnt always go up. When it goes down, that is known as deflation. That has not been a problem in the economy as a whole in recent years, but in can be as big a problem as too much inflation.